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Bondholders mount campaign for robust covenants

Rob Mannix reports on how an investor group aims to stop borrowers giving security over assets to other lenders without doing the same for bondholders

Two new reports point to shortcomings in Eurobond documents that are leaving bondholders unhappy. They cover a range of complaints, from administrative issues such as the tardy dissemination of prospectuses to legal problems such as the structural subordination of bondholders when companies securitize.

The papers are united in their attention to apparently ineffective negative pledges in Eurobond documents and suggest tighter covenants to protect investors' interests.

Bondholders feel they are getting a shoddy deal compared with bank lenders. Take the case of global retailer Ahold. Despite a negative pledge in its bond documents, it was able to borrow close to $2 billion within a week of revealing overstated profits in its US food services division earlier this year. To get funding, it pledged to the banks shares in its US and Dutch subsidiaries in the event of insolvency.

This cut the value of Ahold's assets against which unsecured bondholders would have a claim should it become insolvent. The new loan, and other difficulties, pushed Ahold's bonds from a Fitch BB rating to single B.

Fitch highlights the weakness of negative pledge clauses in its report, Jumping the queue. John Hatton, its author, says bluntly: "Covenants are not as concrete as people think they are."

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